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On Our Radar

Defense Contractors Preparing for Worst With Sequester

The main body section of the first Airbus A350 is seen on the final assembly line in Toulouse, southwestern France.
(REUTERS)

Joe Murphy, now chairman of Ferco Aerospace Group, has worked for 42 years in the aerospace industry – so he says he’s “been there, done that” when it comes to knowing what the long-term effects of defense spending cuts can mean.

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“I worked for GE for 30 years, and I lived through the B1 bomber getting canceled under Carter,” says Murphy. “GE provided the engine for the airplane. When Reagan finally reinstated the B1 bomber, guess how long it took to get another engine out the door? It took another 5 years.”

Murphy and other defense contractors (Ferco Aerospace manufactures brackets and tubes for gas turbine engines) say the sequester – or scheduled federal budget cuts slated to kick off on Friday -- will significantly impact the nation’s ability to defend itself by way of slashing funding to the Department of Defense.

“It’s the dumbest way of doing things I’ve ever heard – they don’t even know what they’ll be throwing away,” says Murphy. “I know that the military needs to be drawn down, but it needs to be done with intelligence, not chopped off with a meat cleaver.”

Marion Blakey, president and CEO of the Aerospace Industries Association, echoes Murphy’s worries. The AIA represents more than 300 aerospace and defense companies.

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“Our companies are tremendously stressed that Congress and the administration are unable to find common ground on something that we and the nation’s leadership agrees is terrible public policy. This will do both real harm to the economy and real harm to the national security,” Blakey says.

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“This was not something that was supposed to happen.”

The Economic Effects of Defense Cuts

According to figures released by the White House, defense spending is where roughly half of the scheduled $85 billion in cuts is to come from. The budget reduction will affect federal workers, federal contractors, subcontractors and vendors in the contractors’ supply chain, says Stephen Fuller, Director of the Center for Regional Analysis at George Mason University. Fuller has been conducting research on the effect of sequestration since the summer of 2012.

“The current number for spending cuts for the Department of Defense is $46 billion,” says Fuller. “The DoD has a much larger procurement budget relative to its payroll budget, so $41 billion of cuts will be made through the cessation of contracts or cutting extensions to contracts.” The remaining $5 billion will likely come from furloughing federal employees.

For contractors, subcontractors and vendors, a $41 billion reduction in contract spending by the Department of Defense will likely result in a loss of nearly 448,000 jobs, estimates Fuller. When adding in the job loss projected for workers in the retail and services industry due to reduced spending, Fuller says that the total job loss will be “equivalent to losing 45% of the expected job growth in 2013.”

That said, the job losses won’t be immediate, says Fuller. “When considering the private sector job losses, they’ll likely occur over the 2013 calendar year [rather than fiscal 2013], and even into 2014, for those vendors at the end of the supply chain.”

In terms of some of the states and cities that will be hardest hit by the cuts, Fuller points to Virginia, Maryland, Washington, DC and Huntsville, Alabama, which is home to NASA’s Marshall Space Flight Center.

“California will take the biggest hit, because they’re 10.5% of the total federal budget subject to sequestration, but Virginia is 9.7%, and it’s a much smaller state, so it’s that much more important,” Fuller says. “The trio of Maryland, Virginia and DC has 21% of the federal payroll and procurement dollars subject to sequestration, but just 4.7% of the nation’s population – it’s a disproportionate level of exposure.”

Defense Contractors Prepare for the Worst

Murphy says that Ferco Aerospace Group has been preparing for federal cutbacks in defense spending for years now, by shifting the bulk of the company’s work to the commercial sector.

“Our efforts have been purposefully focused to keep DoD-funding at 25% or less.” Currently, 80% of Ferco’s sales are done in the commercial marketplace, and Murphy estimates that they will be able to fill the remaining 20% with more commercial sales, should their sales to federally funded programs dry up.

Some other contractors, however, are far less optimistic about the future. Retired General Dan McNeill is the president of the Logistics Company, which provides logistics and IT services to the military. While McNeill has “looked hard” at outlays, expenses and salaries, he is unsure of the company’s financial future. McNeill estimates that 60% of the Logistics Company’s 340 employees are veterans.

“We have to win work to ensure that next year will be OK,” says McNeill. “We can keep costs down and give the government the best price, but if they’re not funding work, it will be difficult.

“My waking moments these days are not unlike my former work as a battalion commander. I need to make the right decisions, so that 340 families can continue to put food on the table and pay their mortgages.”